Failing Health Care Co-ops Will Cost Taxpayers

Consumer Operated and Oriented Plan Programs (COOPs) were really a political compromise between Members of Congress who wanted a public plan option and those who didn’t. Once the Affordable Care Act passed, COOPs had outlived their usefulness. However, they are now failing and will cost taxpayers plenty. Senior Fellow Devon Herrick testified before a congressional committee.

The Illusory Trust Fund

"All payroll tax revenues are spent--the very minute, the very hour, the very day they are received by the U.S. Treasury."

The U.S. Social Security system - like most government-sponsored retirement programs in the world today - is pay-as-you-go. All payroll tax revenues are spent - the very minute, the very hour, the very day they are received by the U.S. Treasury. Most of these revenues are spent on benefits for current retirees. Any additional amount is spent in other ways. But there is no funding of future benefits. No money is being stashed away in bank vaults. No investments are made in real assets.

What Happens When Social Security Has Surpluses and Deficits? These are normal features of any pay-as-you-go system. In the United States, payroll tax collections have exceeded benefit payments since the mid-1980s, and will continue to do so until 2016, when Social Security will begin running deficits again. For example:

In 2001 the government will collect $604.3 billion from workers through the Social Security payroll tax and will spend $438.9 billion on Social Security benefits; thus the Social Security surplus in 2001 will be $165.4 billion.

At the end of 2001, the accumulated value of all the previous years' surpluses will total more than $1.2 trillion.

By 2016 the government will have collected more than $5.4 trillion in Social Security surpluses.

Where is all this money going? In years when Social Security runs a surplus, amounts not used to pay benefits to current retirees are spent by the federal government on other programs or (very recently) to pay down publicly held government debt. For example, much of the 2001 Social Security surplus will be spent on defense issues or economic stimulus as a result of the attacks on September 11, 2001. In years when the system runs a deficit, more is spent on benefits than is collected in payroll taxes and the government uses other tax revenues, mainly individual and corporate income taxes, or borrows to make up the difference.

What Is the Social Security Trust Fund? Most pay-as-you-go systems do not have trust funds, since there are no investments for the trust funds to make. In the United States, we have trust funds - but they serve an accounting function, not a financial function. For example, the Social Security (OASI) trust fund keeps track of surpluses and deficits in retirement, spousal and survivors benefits over time; the Disability Insurance (DI) Trust Fund tracks disability benefits; the Health Insurance (HI) Trust Fund tracks Medicare Part A benefits and the payroll tax that funds those benefits.

But these trust funds do not collect taxes. Nor do they disburse benefits. Every payroll tax check sent to Washington is written to the U.S. Treasury. Every Social Security benefit check is written on the U.S. Treasury.

"The trust funds' special issue bonds are actually nothing more than IOUs the government writes to itself."

Don't the Trust Funds Hold Government Bonds? Yes and no. Technically, the trust funds hold bonds that represent the cumulative surplus (payroll tax collections minus benefit payments). But these bonds are important only for accounting purposes. They have no financial significance and, like bookkeeping entries, no market value. The annual reports of the Social Security trustees list the yields and maturity dates of the special-issue bonds in the Social Security trust fund. But these special-issue bonds are not the same as the bonds held by the public. They are not part of the official outstanding debt of the U.S. government. They cannot be sold on Wall Street or to foreign investors. And they cannot be used to pay benefits.

Moreover, the Social Security trust fund exists within the U.S. Treasury - not as an independent entity. The issuer of the bonds (the U.S. Treasury) and the holder of the bonds (the Social Security trust fund) are the same entity. Thus the trust fund's special-issue bonds are actually nothing more than IOUs the government writes to itself.

On paper, the trust fund has enough IOUs to "pay" Social Security benefits for about 28 months on any given day. In reality, it cannot pay anything. Every asset of the trust fund is a liability of the Treasury. Summing over all government accounts, the balance is zero. For the Treasury to write a check, it must first tax or borrow.

The actual certificates for the trust fund's special-issue bonds are held in government filing cabinets in Parkersburg, W.Va. But if the building were to burn down or thieves were to steal the filing cabinets, there would be no harmful consequences for retirees. Similarly, if the trust funds were abolished, real economic activity would be unaffected. Private bondholders would not suffer, and the government would retain its existing obligations and commitments. Alternatively - as the late economist Robert Eisner suggested - with the stroke of a pen, we could double or triple the number of IOUs the trust fund holds. Either option would allow us to dispense with artificial crises and address the real problem: How is the Treasury going to pay the government's bills?

What's the Problem? Social Security will begin running annual deficits by 2016. At that time, the value of all the IOUs held in the trust fund will total $5.4 trillion. Where will the government get the extra $5.4 trillion to pay back the IOUs? Congress will have only three options: raise taxes, cut benefits or borrow. Ironically, these are the same choices the government would face if there were no trust fund at all.